In just two years, 2011 and 2012, China churned out as much cement as the U.S. in the entire 20th century. Now, about a quarter of its cement capacity is idle. Photo: Associated PressYUQUAN, China—Just about the last thing China needs right now is another cement plant.Unused stocks have been piling up since the massively overbuilt real-estate market cratered in 2014. Demand will likely never fully recover; city skylines are dotted with cranes swinging idly atop half-finished apartment blocks. Alarmed, Beijing has declared that reducing overcapacity in industries like steel and cement is a national priority. There’s even a slogan for it: “supply-side reform.”Yet here in the industrial northeast, Tangshan Jidong Cement, a state enterprise with domestically listed shares, has begun work on a giant 7,200-ton-a-day facility. Bulldozers have ripped a wide gash across low hills to make way for a factory that is likely to exacerbate an already epic glut of cement used to make concrete.This project—and others like it—helps to explain why signs of an economic pickup in China this year are unlikely to last. The rebound is supported by struggling local governments desperate for a short-term lift to growth, even if that means encouraging investment in industries linked to construction that are all in monumental surplus.Their recklessness defies the central government’s efforts to rebalance the economy toward services and consumption. Local officials are masterful at subverting edicts from mandarins in the capital. In the case of cement, new capacity must be justified by closing outdated plants, but the process is full of loopholes. Construction of the Jidong plant in Heilongjiang province is a windfall for the local community. Restaurants are serving up platters of sizzling sausages, a local delicacy, to Jidong contractors in hard hats. A plant this size will bring prestige, tax revenue and employment.The cement industry, however, is in despair at the new arrival. “It’s totally unreasonable,” laments an executive at the China Cement Association. Jidong, which reported losses of $260 million last year as cement prices plunged, didn’t respond to questions.Why would a money-losing enterprise expand capacity in a rapidly shrinking market? The association executive explains a possible rationale: The company may figure that its technologically advanced plant will become the most efficient—and lowest-cost—producer in the region, stealing market share from rivals. It may also calculate that by the time the plant is up and running, some competitors will have gone out of business.“This is a kind of gambling,” says the association executive.The assured outcome will be further downward pressure on cement prices, and mounting financial distress across the industry. That’s a familiar story in the depressed northeast, China’s industrial heartland.But Beijing must bear some of the blame as it continues to rely on bureaucratic engineering rather than market forces and sends mixed signals about its commitment to reducing industrial capacity.Ultimately, a credit-fueled race to the bottom is the product of a political system that demands rapid growth regardless of the ups and downs of the business cycle. Communist Party legitimacy depends upon it. And although President Xi Jinping has pledged to give market forces a “decisive role,” his administration has just unveiled an economic blueprint that leaves the basic logic of the system untouched.To achieve the requisite level of GDP growth under the 13th Five-Year Plan—at least 6.5% a year—China will push semiconductors rather than steel, cloud computing over cement, clean-energy vehicles before polluting glass works. As in the past, though, the state will guide the way. Scott Kennedy, an expert on Chinese industrial policy at the Center for Strategic and International Studies, a Washington think tank, warns that these new areas of focus will become just as prone to overcapacity as the old ones, adding to the problems of economies that compete against Chinese manufacturers.“The problem will spread,” says Mr. Kennedy. “What we will get is growth with volatility.”Chinese liberal reformers had been arguing for a wholesale retreat of the state from industry and more corporate bankruptcies in loss-making sectors. But state planners have largely ignored their counsel. A stock-market rout last year, as well as a currency scare, seems to have made Mr. Xi even more wary about relinquishing state control to the markets. Meanwhile, the cement industry lurches deeper into trouble. China accounted for 57% of global production last year. In just two years, 2011 and 2012, China churned out as much cement as the U.S. in the entire 20th century.Yet, a recent report by the European Chamber of Commerce in China said that despite efforts by the central government to reduce cement overcapacity, the measures “have so far only managed to slow down the rate at which the problem is expanding.” About one quarter of China’s cement capacity is idle.The levels of waste aren’t likely to shrink. As long as China clings to its old growth playbook, today’s cement problem will be tomorrow’s computer-chip crisis.

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